ATP bonds bombed as new CEO quits; yen deals closes quiet primary week; Navistar gyrates

By Paul Deckelman and Paul A. Harris

New York, June 8 - ATP Oil & Gas Corp. fell sharply in very heavy trading Friday on the surprising news that before even unpacking his briefcase, new chief executive officer Matt McCarroll would leave the company over contract disputes.

That's a turn from the direction that ATP's bonds took during most of the week, firming ever since the offshore energy company announced that it hired McCarroll, a well-respected industry professional.

Those bonds - and the company shares - bounced off the bottoms they initially hit on the stunning news, although they both still ended well down on the session versus pre-news levels.

ATP's bombshell was clearly the highlight of the day in Junkbondland, which didn't have much going for it otherwise.

The primary market saw just one deal price. That one was a yen-denominated offering worth the equivalent of $400 million from Renault SA. The dollar market meantime finished the week the same way it had begun, with no pricings seen.

That closed out the quietest new-issuance week so far this year. Just two dollar-denominated fully junk-rated deals priced, totaling about $330 million of proceeds. Those deal priced in the middle of the week for Fifth & Pacific Cos., Inc. and Norbord Inc.

That was even quieter - and considerably so - than the anemic $1.235 billion ($1.174 billion total proceeds) that priced in just four tranches last week, ended June 1. That was the quietest week-to-date this year before this week. This week was the fourth consecutive week in which new-deal issuance was less than the week before, as issuers and investors alike continue to grow more cautious about the previously booming and free-wheeling junk market.

Just how cautious was underscored with EPFR Global's report of a $3.6 billion net outflow from high-yield mutual funds and exchange-traded funds that that it tracks in the week ended Wednesday, confirming similar data from rival fund-tracking service AMG that circulated in the market late Thursday.

Traders saw the secondary market marginally higher on a generic basis Friday.

Among specific names, Navistar International Corp.'s bonds initially continued to fall in the wake of Thursday's terrible earnings report, though they did bounce off the bottom and stabilized a little later on.

Statistical junk market performance indicators were up for a third consecutive day Friday, and finished higher than a week earlier for the first time in five weeks.

No dollar deals in junk land

No dollar-denominated junk issues priced Friday.

However, Renault priced a ¥32.3 billion ($405 million) issue of 3.2% two-year notes (Ba1/BB+/BBB+) at a 280-basis-points spread to the Japanese benchmark.

The spread came on top of spread talk that was revised from earlier talk of 275 to 285 bps.

Mizuho Finance and Mitsubishi UFJ Morgan Stanley Securities Co. Ltd. managed the sale.

Eyes on Zayo

The June 4 week saw just $530 million of issuance in three tranches of junk-rated, dollar-denominated notes.

However with three consecutive days of stability in the stock market the high-yield primary market should be poised to see a greater amount of activity in the week ahead, according to a trader from a high-yield mutual fund.

Two deals are expected to launch during the June 11 week.

Zayo Group LLC's $1.25 billion two-part offering of notes is one of them.

The bonds, backing the acquisition of AboveNet Inc., are expected to come in the form of a $750 million tranche of senior secured notes and a $500 million tranche of senior unsecured notes.

The unsecured bonds are being discussed in a 10% to 10½% yield range, according to a buyside source who plans to be involved.

The secured notes ought to come slightly lower than 8%, the source added.

Morgan Stanley and Barclays are the leads in a syndicate of banks that includes SunTrust, UBS, RBC and Goldman Sachs.

The other transaction expected to launch in the week ahead is P.F. Chang's China Bistro Inc.'s $300 million offering of senior notes, which will help fund the leveraged buyout of the company by Centerbridge Partners LP.

Deutsche Bank is leading the bond deal in a syndicate that includes Wells Fargo and Barclays.

Roadshows for one or both of those deals could easily carry the pricings into the May 18 week, sources say.

An opportunistic pipeline

Beyond those two committed financings is a modest pipeline of opportunistic deals, most of which involve debt refinancing, market sources said.

Most of the prospective issuers in that pipeline are rate-sensitive and are unlikely to be lured into a volatile market.

An ongoing parade of negative financial and economic headlines out of Europe is stoking much of that volatility, the trader asserted.

Fears surrounding the integrity of the euro zone are not impacting issuers such as CIT Group and Ford Motor Credit, but are definitely making things more difficult for issuers with lower credit quality, issuers with comparatively small deals and issuers new to the market, the trader said.

Parsing the flows

News of massive outflows from the high-yield mutual funds also could impede a meaningful regeneration of the primary market, sources said late in the June 4 week.

On Thursday, the market heard news of a $2.93 billion outflow from high-yield mutual funds and exchange-traded funds during the week to the May 6 close, sources said, referring to information from Lipper-AMG.

It was the third largest weekly outflow ever, an investor said.

However, two factors somewhat mitigate the blow, a trader said Friday.

One is the timing of the outflows, which primarily occurred during the first two days of the most recently concluded reporting period - Thursday, May 31 and Friday, June 1.

The ensuing Monday and Tuesday were moderately more negative and Wednesday was positive.

Also Thursday was positive, the trader said.

That positive momentum carried through to Friday, during which a buy-list from an exchange traded fund (ETF) materialized.

News on the ETF-front had been dire, the source related, conceding that 10-day trailing rate flows for ETFs to Thursday's close were negative $544 million, according to information in a report from Lipper-AMG.

However, ETFs actually saw $126.4 million of inflows Thursday, the source added, again citing the report from Lipper-AMG.

The other factor mitigating the blow from the huge outflow is Ford, the trader said.

On May 22, Moody's Investors Service elevated Ford Motor Co. and Ford Motor Credit Co. from the high-yield asset class when Moody's lifted Ford Motor to Baa3 from Ba2 and Ford Motor Credit to Baa3 from Ba1.

A lot of high-yield managers may no longer have those bonds in their portfolios, the trader said, and added that the money that had been invested in those bonds is technically no longer in high yield, but has migrated into the realm of investment-grade bonds.

Matt, we hardly knew ye

Secondary market traders agreed that Friday's biggest junk-market story was the sudden departure of Matt McCarroll as the CEO of ATP Oil & Gas after not even a week on the job.

The company only announced his hiring last Friday. It put out an announcement after the market closed Thursday to the effect that McCarroll had resigned, effective immediately.

The bonds had been on a roll for a few days following the initial announcement of McCarroll's hiring as CEO, replacing T. Paul Buhlman, who would remain as chairman; McCarroll is a veteran energy industry executive, having served as a member of the senior management team of Plains Resources Inc., then as president of Maritech Resources Inc. and more recently, Dynamic Offshore Resources LLC. He founded Dynamic and later oversaw its sale to SandRidge Energy for $1.3 billion.

Following the news of McCarroll's hiring, ATP's 11 7/8% second-lien senior secured notes due 2015 moved as high as around the 57 bid level by mid-week, well up from the lower 50s before the McCarroll hiring.

But all of that came to an abrupt end Friday when the market opened and investors acted on the late Thursday news, hammering the bonds down at least 10 points on the session, a trader said, quoting them around 47 bid, 48 offered, on tremendously heavy volume of more than $200 million. That made the Houston-based offshore energy company's issue the undisputed junk-market volume leader.

A second trader said the initial carnage was even worse, with the bonds going all the way down to lows around 43½ bid before bouncing back to around the 48½ bid level late in the session.

"Holy smokes," the trader said when he saw the size of the rebound off the early lows. "Perhaps somebody decided that the resignation was not that big a deal," the trader said.

He cautioned that although the Trace system was recording something like $200 million of the issue changing hands, the actual turnover "is likely much larger," since the system does not accurately reflect the true size of any junk trade of more than $1 million, simply labeling such trades as "1MM+."

Demonstrating the level of cynicism in the currently unsettled market, the first trader joked that "it only took him a week to find the cockroaches." A second trader laughed at the idea that after a seven-day stint, the CEO resigned. He said his initial reaction was McCarroll "found something there that he didn't like."

However, he added, "I think it was more that they couldn't come to a contractual agreement."

ATP, in its late-Thursday announcement, said in fact that it was "unable to reach a mutually agreeable employment agreement" with McCarroll.

But not everyone was buying that explanation Friday.

"Why would they announce that they had hired a new CEO without inking a contract?" a trader asked.

"That's pretty shaky," another trader said of ATP's explanation for the CEO's short term. He speculated that McCarroll might have discovered an element of fraud at the company.

"I don't know what he found," another trader said. "You can speculate as to why he left. Maybe he found something he didn't like."

The company also announced the cancellation of McCarroll's purchase of 1 million shares of the company's stock, which was to be a gesture of his commitment to the new company.

ATP's Nasdaq-traded shares initially fell as much as 15.9% in intra-day dealings before finally going out down 53 cents, or 9.08%, at $5.31. Volume of 5.5 million shares was between three and four times the usual turnover.

No sector fallout

A trader saw little impact from the ATP news in the broader energy sector since this was more of a company-specific development rather than something that has industry-wide ramifications.

"Some were up, some were down, but it's not like everything was negative," he said. "I'd say that was the only major mover."

For instance, he saw Chesapeake Energy Corp.'s bonds mostly higher, even with the Oklahoma City-based natural gas company having its annual shareholders meeting Friday. Observers predicted that the meeting might serve as a forum for disgruntled stockholders to express their dismay over the recent course of the company.

He said that most of the issues were up by anywhere from half a point to a point, on some trading. He said Chesapeake's 6.775% notes due 2019 gained three-quarters of a point, last trading at 98 bid, while its 6 5/8% notes due 2020 were a point better, at 98 bid.

More than $17 million of the 2019 bonds traded by mid-afternoon. More than $7 million of the 2020 bonds also traded.

Navistar gyrates

Navistar International, whose bonds slid Thursday by five or six points from levels around 103 down to the upper 90s after the company announced a big loss, were seen bouncing around Friday.

Volume was brisk with more than $38 million of its 8¼% notes due 2021 trading by mid-afternoon.

A trader quoted the bonds going home at 97 bid. "They got back some of what they lost," he said, estimating a gain at about a point.

A second trader saw the Lisle, Ill.-based truck, bus and diesel engine manufacturer's paper "up a touch today," trading as high as 97¼ bid, up from early lows around 95.

"They were mostly at 96 [Thursday], so they went out at their highs," he said.

"Of course," the trader added, "last week, they were at 104."

The bonds slid Thursday on very active dealings of more than $60 million, a market source said, after the company stunned Wall Street by reporting a sizable loss for the fiscal second quarter ended April 30. Analysts were looking for a gain. The company also announced sharply lowered full-year earnings guidance.

Junk signs up on day, week

Statistical indicators of market performance were higher across the board Friday for a third straight session. They also finished higher versus the week before for the first time in several weeks.

A trader saw the Markit Group CDX North American Series 18 High Yield Index up for a fourth consecutive session, rising by a half-point Friday to end at 94 3/8 bid, 94 5/8 offered, after jumping by nearly a full percentage point Thursday.

It also was up from the 91 7/8 bid, 92 1/8 offered level at which the index ended the previous week on Friday, June 1.

The KDP High Yield Daily Index was up for a third straight session, firming by 7 basis point to 72.34, on top of the 29 bps jump seen Thursday. Its yield came in by 2 bps, to 7.09%, after falling by 11 bps Thursday.

A week earlier, the index had at 72.01 reading and a 7.18% yield.

And the widely followed Merrill Lynch U.S. High Yield Master II Index was up for a third straight day, gaining 0.066%. That followed Thursday's gain of 0.443%.

The latest gain lifted its year-to-date return to 4.974% from Thursday's 4.904%, though it was still well down from the peak level for 2012 so far, 6.80%, set on May 7.

For the week, the index gained 0.504%, lifting it from the prior week's 4.448% return; it was the first weekly gain after four previous week-over-week losses.

But one market indicator that seems to be pointing south is the flow of funds into and out of high-yield mutual funds and exchange-traded funds, which are considered a reliable proxy for market liquidity trends.

On Friday, Cambridge, Mass.-based EPFR Global reported that in the week ended Wednesday, some $3.6 billion more left those funds than came into them. It was the fourth consecutive downturn for the funds, and dropped EPFR's estimate of year-to-date flows down to about an $18.5 billion inflow.

The EPFR numbers confirmed Thursday's fund-flow report by a competing company, the AMG Data Services division of Thomson Reuters LLC's Lipper analytics division. Arcata, Calif.-based AMG, which uses a different methodology than EPFR, said that in the week ended Wednesday, $2.9 billion left the various funds than came into them. So far this year with 23 weeks gone, inflows to the funds were seen in 18 of those weeks and outflows in five of them, including the past four weeks.

Stephanie N. Rotondo contributed to this report

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